Canberra-based XTEK secured the $101 million deal to build a new "Small Unarmed Aerial Systems" (SUAS) capability which will be used for tactical intelligence, surveillance and reconnaissance.
The technology has already been adopted by the US Air Force, and the system can be carried, assembled and operated by one soldier.
XTEK's shares jumped following the announcement and at around midday AEST, they were up 12.5 per cent to $0.45.
Minister for Defence, Marise Payne, says the investment which will create 10 new jobs in Canberra and dozens more in the supply chain will greatly increase the capabilities of the defence force.
"Similar systems, including the Skylark, have been used by our soldiers in Afghanistan and Iraq with tremendous success," says Payne.
"They provide our military with a faster and better understanding of the battlefield than our adversaries."
The capability will be acquired in two tranches; with the WASP AE chosen as the preferred option for the first tranche to meet an immediate need. The funding approved today will meet the first tranche of the capability.
The second tranche will upgrade the WASP AE or acquire a replacement system within the next decade.
Minister for Defence Industry, Christopher Pyne, says the investment will be ongoing.
"Importantly, a significant portion of this investment will remain in Australia, with local industry content valued at approximately $11 million for acquisition, plus up to $4 million each year for sustainment," says Pyne.
"Defence will work closely with Australian industry through the Centre for Defence Industry Capability to maximise opportunities for local companies to get involved in this important project."
XTEK is hugely involved in the development of high-tech products for the Defence Industry, notably the group's XTEK Tac 2 Sniper System, and geospatial mapping technology.
Never miss a story: Sign up to Business News Australia's free news updates
Follow us on Twitter, Facebook, LinkedIn and Instagram
Get our daily business news
Sign up to our free email news updates.